This Investing Strategy Brings Growth and Reasonable Yield
By Carleton English
It may take some time for global travel to return to prepandemic levels, but that’s no reason to keep all of one’s investments on this side of the pond—particularly for income-hungry investors.
Global dividends are poised to rise 12% to $1.7 trillion in 2021, according to a recent analysis by Jefferies Financial Group, snapping a three-year streak in which dividends hovered around $1.5 trillion.
The U.S. accounts for nearly a third of this year’s projected dividends but is expected to see only 3% growth.
Europe and emerging markets are projected to post the strongest dividend gains this year—up 23% and 22%, respectively—as the regions, which saw payouts take a hit last year, are poised for recovery from the pandemic.
“In our view, markets are underestimating the potential for dividend recovery. As the world opens up post-Covid, we believe that dividend recovery will surprise investors,” writes Desh Peramunetilleke, head of global microstrategy at Jefferies.
With financial markets recently turning volatile as last year’s popular tech trade unwinds and the CBOE Volatility Index, or VIX, climbs to its highest level in two months, investors should be on the hunt for more value-oriented plays.
While the U.S. offers opportunity for income investors, particularly in last year’s hard-hit sectors in consumer discretionary and materials—both of which are expected to increase dividends by more than 10%—the real gains will be overseas.
Peramunetilleke advises using the GARY strategy—growth at a reasonable yield—to find opportunities.
“We believe that long-term investors should focus on companies that offer the best of both worlds in terms of yield and growth,” Peramunetilleke writes.
Highflying tech names that propped up the market last year are falling out of favor as valuations get stretched and yields rise.
But there are still plenty of companies that are able to thread the needle of providing a reliable dividend while also growing.
Screening for GARY stocks involves sorting out companies with healthier dividend-payout ratios—namely paying out less than 80% of earnings in dividends.
While 80% is the metric, it’s worth noting that many companies in Jefferies’ analysis have payout ratios below 50%.
The companies must also have a demonstrated history of maintaining its dividend.
Jefferies has been looking at data going back as far as 26 years—though some companies are newer—and has marked companies that have instances of slashing their annual dividend by more than 5%.
From there, the Jefferies team examines companies with market capitalizations in excess of $2 billion, with a 12-month projected dividend yield above median in their respective regions, and a compound annual growth rate for earnings per share for 2021 and 2022 in excess of 10%.
Some names may catch investors by surprise in light of recent headlines.
But when accounting for the companies’ comparatively lower payout ratios and dividend sustainability, the opportunities look compelling for long-term investors.
Topping the list of opportunities is Taiwan Semiconductor Manufacturing (ticker: 2330.Taiwan), which currently yields 1.8% and is expected to see growth in EPS of 12.4%.
To be sure, shares of the world’s largest chip maker have faltered in recent weeks amid the much broader global chip shortage.
South Korea-based Samsung Electronics (005930.Korea) also tops Jefferies’ list with its 2.2% yield and projected EPS growth of 36.3%.
It also is facing a challenging patch due to the global chip shortage, warning in March that it could cause a “serious imbalance” in supply and demand.
Outside of Asia, investors can find compelling opportunities in Europe, namely in Siemens (SIE.Germany) and AstraZeneca (AZN.UK).
Siemens’ shares are up 18.5% this year and the industrial conglomerate recently lifted its guidance and topped analyst expectations when reporting fiscal second-quarter results earlier this month.
The stock yields 2.6% and EPS should grow 21.6%. The company has been seeing growth from China as well as from the automotive industry and its software business.
AstraZeneca offers some value for income-oriented investors even after its Covid-19 vaccine has fallen out of favor.
Shares are up 9% this year and investors get a 2.7% dividend yield.
In the first quarter, the company posted 7% revenue growth, excluding a 4% gain for its Covid-19 vaccine.
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Of course the U.S. still offers opportunities in familiar names for investors looking for income while also providing global exposure.
JPMorgan Chase (JPM) is a favorite as it has already benefited from the rebound in financial stocks and is projected to do well as interest rates rise.
Like all big banks, JPMorgan had to halt its buybacks and cap dividends in 2020 as the Federal Reserve ordered banks to conserve capital during the depths of the pandemic.
But those restrictions are expected to ease on June 30 following the completion of the Fed’s annual stress test.
JPMorgan currently yields 2.4%, and the bank is expected to increase EPS by 16.1%.
Coca-Cola (KO) with its 3.2% yield and projection of 9.9% earnings growth, just fits into Jefferies’ screen.
Shares are flat this year as some of the hopes of swift reopening fizzled in the earlier part of the year.
The company works as a turnaround story as it culls underperforming brands and as a reopening play as theaters and sporting venues once again can host spectators.
With sales in more than 200 countries, Coca-Cola is also a play on improving emerging-market trends while staying domiciled in the U.S.
While investors may want to go global for income opportunities, there’s reason to keep at least one foot planted in the U.S.
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